The first day of November saw Christine Lagarde take over the ECB Presidency on the same date that the bond purchasing programme was resumed. As ECB President, Lagarde is now responsible for setting Eurozone interest rates, controlling the money supply and overseeing the largest banks in the Eurozone.
An unconventional choice for ECB Presidency
As Mario Draghi’s successor, one cannot help but notice the stark differences between the two. ECB President Christine Lagarde is not an economist and has no experience in monetary policy. A lawyer by profession, Lagarde has served as a Finance minister in the French government, and held the role of the managing director of the IMF prior to her nomination as President of the ECB.
Despite that her appointment to ECB President is viewed as unconventional, Lagarde’s political experience and diplomatic skills might be the prerequisite to push forward the Eurozone reform process.
Lagarde inherits slowing economy, monetary policy almost out of ammunition
Lagarde is joining the ECB at a challenging time. The latest Manufacturing Purchasing Manager Indices (PMIs) for Eurozone and Germany issued last Monday confirmed once again the manufacturing slowdown across the region.
The IHS Markit Eurozone Manufacturing PMI was reported at 45.9 compared to the expected reading of 45.7, while the German manufacturing PMI read at 42.1 compared to expected value of 41.9. Although the PMIs moved slightly higher than expected, the reading is significantly below the 50 threshold that separates contraction from expansion.
The increasingly challenging economic environment and low inflation levels has brought a divide within the ECB, as the costs and benefits of further negative rates and asset purchases become less clear. Despite record negative interest rates and the restarting of the quantitative easing program, macroeconomic indicators continue to point at a weakening European economy. In fact, Draghi’s latest monetary stimulus has been widely criticised by the heads of Germany, France, the Netherlands and Austria’s central banks.
With growing concerns on the ineffectiveness of monetary policy, Lagarde’s main challenge is to push for European governments with fiscal space to adopt expansionary fiscal policies to stimulate the economy, most particularly Germany. However, striking a balance with Germany will be complicated given the current political developments in the said nation.
Lagarde’s first official appearance was held on Monday at an award ceremony for former German Finance Minister Wolfgang Schaeuble, in Berlin. During her first speech in the capacity of ECB, Lagarde highlighted the different views held in the past of what constitutes a good solution for Europe, and the appropriate balance between sharing and reducing risks.
Lagarde indirectly referred to the current divided ECB by quoting the former German Finance Minister himself: “if a solution is good for Europe, it is good for Germany; and if something is bad for Europe, it cannot be good for Germany". She concluded her speech with a message to all of Europe, calling for “strength, resolve and courage”.
Disclaimer: This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.